This entry of the “First Time Home Buyers” series is all about preparing your finances and credentials for a mortgage! Specifically we are going to be breaking down the 5 C’s of Mortgage. The topic of credit and finances is such a sore spot for many people, especially for young couples looking to buy their first home. With more and more Americans carrying unnecessary debt the topic of credit has truly become a feared one. Believe it or not we have come in contact with a lot of people afraid to even look at their credit score! The bottom line is whether you have good or bad credit it is important to realize just how important all of the 5 C’s are to getting your first mortgage! The good news is we are going to explain exactly why the 5 C’s matter and how you can prepare yourself to guarantee mortgage approval. I am sure you’re wondering by now, what are the 5 C’s? The 5 C’s are Credit, Capacity, Capital, Collateral, and Conditions.
So let’s get right to them;
Your credit score and history is a HUGE factor in getting approved for a mortgage! It’s likely the first step a lender will take when starting the process. It is imperative that you are pro-active in preparing your credit for the process. Some tips for success are below;
- Get a free credit check prior to talking to a lender.
- Pay down as much debt as possible improving your debt/income ratio.
- Reconcile any defaulted payments on other borrowed funds.
- If there are blemishes from past mistakes that are now reconciled try to get those removed from your report.
- In cases involving bad credit it may be worth your time to speak with a specialist about raising your credit score.
When preparing yourself to be approved for a mortgage, lenders view “Capacity” as your ability to pay back a prospective mortgage. Every lender you work with will want to know exactly how you are going to pay the loan back. The biggest factors in determining your capacity are your cash flow/savings, debt to income ratio, and probability of successful repayment. The probability of successful repayment is determined by your credit history and current relationships with other credit lenders. Here are questions to think about when preparing to be approved for a mortgage.
- How can I improve my debt to income ratio?
- How can I save more money?
- Is it possible to make more money or prove more income?
Capital is simply the amount of funds you are willing to risk upon getting the mortgage. Also known as a “Down Payment”. The risk on lenders for default in today’s economy is massive and ALL prospective Lenders will expect you to contribute your own funds as a down payment. Lenders view this as a very simple equation. The more money you risk with a down payment, the less likely you are to default on the loan. There is overwhelming statistical evidence to support this idea as well.
All though there is a big difference between the two, lots of potential buyers mix up collateral and capital. Collateral is not a down payment. Collateral are additional forms of security you can provide the lender in regards to your loan. Obviously in any situation involving the purchase of a home the home becomes collateral. However it is worth noting that other collateral assets can be pledged if needed. Sometimes a lender may require a collateral in the form of a “guarantee”. Also commonly known as a co-signer. This is just someone else guaranteeing that if you are not able to pay back a loan they will.
In a typical lending scenario conditions describe the general purpose of the loan. However, given the context of buying a home that is already apparent. Before a loan is agreed upon between you and the lender; the lender will deliver a set of conditions. These conditions will need to be satisfied before you can close on your mortgage. Examples of some common conditions on a mortgage approval, are evidence of homeowners insurance, an updated pay stub, evidence the borrower received a copy of the appraisal on their new home, etc.
These are the 5 C’s of Mortgage! Get a great handle on these and you will be well on your way to getting approved for your first mortgage! Look for future blog posts detailing the complete pre-approval process for more tips!
Are you looking to buy a house and need a mortgage? We would love to help! Please leave a comment or Click Here and find the most convenient way for you to contact us.